Monday, October 26, 2009
Religious innovations in finance
A German bank is soon to begin offering financial services that comply with Islamic Sharia law. See these earlier posts here and here for some background info. Such financial services have existed in other countries, and actually did pretty well during the recent financial crisis. This news is another indication of the continued growth of Islam in Germany and Europe. And in case you were wondering, yes, financial services also cater to people of other faiths. Overall, this is just another way in which religion and other aspects of life intersect.
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Because of the current economic state and credit crunch, financial institutions are more willing to innovate and create new services to meet unfulfilled demand. While financial institutions are more willing to invest in non-traditional banking methods, these methods may actually be more secure than conventional methods. As the article states, the market continues to grow 15 to 20 percent per year, which can be explained by a more stable and secure market based on the learnings of the Islamic faith.
ReplyDeleteSince Muhammad's prohibition on interest rate is based on the concept of greed, this new banking method is based on the idea that there must be a legitimate transaction of goods and services. This idea of legitimacy from the Islamic faith acts as a screen for illegitimate borrowers who potentially have bad credit. By weeding and screening out potentially 'bad' borrowers, the market will only have transactions that benefit both borrowers and lenders, thus making the market more efficient.
Wylie Kyi
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Jia Hui Huang
ReplyDeleteBanks are using new ways to offer financial services such as complying to Islamic Sharia law to get to the people in order to maintain the banks' performances during the current financial crisis. As stated in the other article, people are less likely to go to the bank where the cost exceeds the benefit. So, the Islamic banks create different ways of earning profit but still comply with Sharia and also making the people satisfy. The Islamic banks can create rules that broad enough to cater more people of different faiths. If the financial institutions don't look for different ways to get the people, the bank will just wait to close down.
Wylie and Jia, I think the real story here is that there is a large demand for Sharia compliant financial investments that has not been adequately satisfied by the market. I wonder if the banks would generally prefer higher performing financial services and Sharia compliant services are usually not high performers during good economic times.
ReplyDeleteJia Hui Huang,
ReplyDeleteI think that the bank would prefer what is most demanded by the people because the people are the actual ones that consume these financial services in the end. Although many of the Sharia compliant financial investments have not been adequately satisfied by the market, more people consuming their financial services will lead Sharia compliant services' expansion. The market is controlled by the consumer, so the consumers decide how the market work.
Jia, I think it's a bit more complicated. It's probably more accurate to say that banks want to maximize their profits and doing so is not the same as satisfying customers.
ReplyDeleteWhile banks would prefer high performing financial services, a higher level of risk accompanies these service. Traditionally banks may choose to diversify their portfolios with high and low risk; however, in my opinion, banks in the current economic state are looking for lower risk, untapped, niche markets, such as the Sharia compliant investments.
ReplyDeleteI feel that the bank in this situation was merely trying to reach out to a share of the market that had gone unnoticed. By reaching out to those who practice Sharia law they can earn increased revenue from the new customers as well as create a name brand for muslims in Germany. This relates to class because what the bank is doing is offering a religous good. While not everyone will be interested in this new service practioners of Sharia law will obviously be. In the end I feel this is a smart move for the bank because the risk to them is low and the rewards seem to be stable as indicated by the market growth that was referenced in the article.
ReplyDeleteCasey Kiesling 29605481
Wylie and Casey, I agree with your sentiments, and I expect we'll see more of this in Europe where Islam is spreading.
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